Speculation on Gold Fixing

There has been speculation that the gold market is fixed, a market that represents $20 trillion in assets. In a procedure that dates back to 1919, five global banks come together daily in London in order to set the price of the precious metal, and market participants are weary that these banks use their insider information for an unfair advantage.

The problem is, HSBC Holdings, Societe Generale, Barclays PLC, Bank of Nova Scotia and Deutsche Bank (those whom determine the price of gold) are able to trade the asset prior to releasing the information and the price of gold is set. It rings a similar bell, one where forex traders manipulated rates by trading within the 30 second window before the WM/Reuters rates are set.

“Traders involved in this price-determining process have knowledge which, even for a short time, is superior to other people’s knowledge,” said Thorsten Polleit, chief economist at Degussa Goldhandel GmbH. In the realm of computerized trader, that information can make a lot of money in a very short period of time. “In a world where trading advantage is measured in milliseconds, that has some value,” said Andrew Caminschi, a lecturer at the University of Western Australia, who published work on the gold spikes following the London fix.

The banks communicate through phone calls twice daily and allowed to trade gold and gold derivatives based on their communications. Expectedly, trading volume just after these communications erupts.

The British Financial Conduct Authority (FCA) and the Commodity Futures Trading Commission (CFTC) are examining how these prices are set, but the FCA is only conducting a preliminary investigation.

“The gold market is hugely influential, and there needs to be public trust in the gold price,” said Pat McFadden, a labor lawmaker. He said that British regulators much probe any manipulation by dealers. Barclays PLC is having their hands in everyone’s cookie jar after allegations of falsifying LIBOR rates, manipulating the foreign-exchange market, and now, potentially, rigging the gold market.

Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business, spoke of the lack of oversight that is quite similar to how LIBOR is created. “It’s controlled by a handful of firms with a direct financial interest in where it’s set, and there is virtually no oversight — and it’s based on information exchanged among them during undisclosed calls,” she said.

The phone calls between the five banks happen at 10:30PM and 3:00PM during London hours. What is under scrutiny is that at 3:01PM, the trading volume spikes 47.8 percent above average levels for a 20 minute period, and the increased volume remains 20 percent higher than normal for the following six minutes. The vast majority could be strictly traders speculating the outcome, but if the five banks are allowed to trade on their information during the proceeding, there is clearly an unfair advantage.

In research published by Caminschi, the accuracy of trade direction a minute prior to the meeting was about 50 percent. However, the success rate from 3:01PM jumped to almost 70 percent and more accurate in the following minutes. In days where gold moved more than $3 per ounce, trades were right nearly nine of ten times.

Nevertheless, those in academic and financial professionals believe the gold fixing meetings are outdated and should be changed. Abrantes-Metz said there is more than enough data through floor and electronic trading that is needed to set the price of gold.

Christopher started his journey trading options and futures in the energy markets while undergoing his degree at Pennsylvania State University in financial economics and minoring in energy policy. After obtaining a position at EosTrade, under well-known trader Jay Norris, Chris began analyzing currency markets while developing trading strategies on how to exploit price discrepancies, mean reversion, and developed a proprietary brand of technical analysis called "price memory."
Currently at Forex Root as the Senior FX & Commodities Analyst, Chris brings viewers up-to-date news, market analysis and trading ideas in a broad range of currency pairs and commodities. All charts represented in work are created by the ThinkorSwim platform, unless otherwise indicated.

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